AN INTRODUCTIONMcGraw-Hill Higher Education 37 seCraw-Hill Capris, NATURAL RESOURCE ECONOMICS Published by InviaMoGraw-Hil, an imprint of The McGraw-Hill Companies, Inc. 1221 Avenue ot the Amencas. New York, NY 10020. Copyright © 2001, by The McGraw-Hill Companies, Inc. All Fights reserved. No pat ofthis publication may bé Teproduced or distributed in any form or by any ‘means, or stored in a database or rival syst, without the prior witen consent of The eGraw-Hil Companies, ne. inluding, But not fried to, i any network or ether electronic storage or ransmission, or broadcast for distance leaming. ‘This book is printed on acc-roe paper. 1294567890 FGRFORO9876543210 ISON 0-07-291677-2 Editorin-chiet: Gary Burke Senior sponscring editor: Lucile Suton Editorial assistant: Joanna Honkman Marketing maragor: Nelson Black Project manayor. David Sutton roducton supervisor: Pam Augspurger ‘Supplement coordinator: Louis Swaim Gover dosign: Susan Newnan Design, nc Camgesior Shepherd nc. ‘Typetace: 10/12 Palatino Pnter: Fairfield Graphics, tne Lorry of Congress Cataloging n-Publcation Data Field, Barry ©. ‘Natural resource economics : an introduction / Barry C. Feld p. om Inludes index ISBN 0.07-231677-2 (ak. paper) 1 Natural sources, 2. Environmental poly. 3. Sustainable development, Tie cas £54 2000 3887-4021 00-038076 hetp aw mte.comABOUT THE AUTHOR Barry C. Field is Professor of Resource Economics at the University of Massa- chusetts in Amherst. Previously he taught at the University of Miami and The George Washington University. He received his BS. and MS. degrees from Cornell University, and his Ph.D. from the University of California at Berkeley. At the University of Massachusetts he has devoted many years to teaching natural resource economics to students at all levels, and has worked to de- velop an undergraduate major in environmental and resource economics. Professor Field is the author of numerous articles on resource and environ- ‘mental economics.SECTION | CONTENTS PREFACE INTRODUCTION r Important Issuas in Natural Resource Economics NATURAL RESOURCE ADEQUACY ‘SOCIALLY OPTIMAL RATES OF RESOURCE USE IDENTIFYING THE SOURCES OF NATURAL RESOURCE MISMANAGEMENT PRESERVATION VS. EXTRACTION: VALUATION OF THE ALTERNATIVES PROPERTY RIGHTS ANO NATURAL RESOURCES THE USE OF BENEFIT-COST ANALYSIS IN NATURAL IESOURCE DECISIONS LAND.USE ISSUES: NATURAL RESOURCE ACCOUNTING INTERNATIONAL NATURAL RESOURCE CONFLICTS NATURAL RESOURCES AND ECONOMIC DEVELOPMENT SUMMARY ‘Natural Resources and the Economy SOME TERMINOLOGY ‘THE RANGE OF NATURAL RESOURCE SERVICES MODELING RESOURCE SERVICES “4 16 18 1° a 2 24 ar 2aconrents SECTION I 3 SECTION II, 6 SOME WORDS ABOUT ECONOMICS THE POLITICAL UNIT PROBLEM SUMMARY BUILDING BLOCKS. Wilingness to Pay/Oemand WILLINGNESS TO PAY DISCOUNTING SUMMARY Costs/Supply ‘OPPORTUNITY cost cost cuAvEs ‘THE SHAPES OF COST CURVES MARGINAL COSTS AND SUPPLY TAXES AS COSTS SUMMARY 7 Efficiency and Sustainability STATIC EFFICIENCY DYNAMIC (INTERTEMPORAL) EFFICIENCY IST APPROPRIATE TO DISCOUNT? EFFICIENCY AND INTERGENERATIONAL EQUITY: THE ISSUE (OF SUSTAINABILITY i SUMMARY GENERAL NATURAL RESOURCE ISSUES Markets and Eificiancy MARKET DEMAND AND SUPPLY MARKETS AND STATIC SOCIAL EFFICIENCY MARKETS AND INTERTEMPORAL EFFICIENCY SUMMARY Public Policy for Natural Resources ‘THE OBJECTIVES OF PUBLIC POLICY TYPES OF PUBLIC POLICIES PRIVATE PROPERTY RIGHTS a 35 39 a ges 87 58 62 85 86 ov 70 n 73 78 8 a 8 st 101 103 08 107 110GOVERNMENT. SPONSORED INCENTIVE POLICIES 15 DIRECT CONTROLS na DIRECT PUBLIC PRODUCTION 120 MARKET FAILURE/GOVERNMENT FAILURE 21 POLICY CENTRALIZATION/DECENTRALIZATION va suMMaRy 128 SECTIONIV. NATURAL RESOURCE ANALYSIS: 127 8 Principles of Analysis 128 IMPACT ANALYSIS 18 COST-EFFECTIVENESS ANALYSIS 132 BENEFIT-COST ANALYSIS 132 SUMMARY 148 ©The Valuation of Natural Resources 151 MEASURING BENEFITS 152 ACTIVE (USE) BENEFITS 153 NONUSE (PASSIVE) BENEFITS 159 MEASURING COSTS 163 SUMMARY 168 SECTION V. APPLIED NATURAL RESOURCE PROBLEMS 172 10 Mineral Economics 173 GEOLOGICAL FACTORS AND COSTS OF EXTRACTION 174 EXTRACTION ECONOMICS FOR A KNOWN STOCK 178 RESOURCE EXPLORATION AND DEVELOPMENT 182 NONFENEWABLE RESOURCES AND SUSTAINABILITY 184 MINERALS PRICES IN FACT. 186 U.S. MINERAL IMPORT DEPENDENCE 188, OTHER POLICY ISSUES 191 THE ECONOMICS OF RECYCLING 192 SUMMARY 196 1 Energy 199 ENERGY USE IN THE UNITED STATES: CONSUMPTION [AND PRICES 200 ‘THE POLITICAL ECONOMY OF ENERGY MARKETS. 202 ‘THE QUESTION OF ENERGY ADEQUACY 208 THE ECONOMICS OF ENERGY SELF-SUFFICIENCY 205contents: cry 13 4 18 ENERGY CONSERVATION ECONOMICS OF CAFE STANDARDS ECONOMIC ISSUES IN ELECTRICITY DEREGULATION ‘SUNMARY Forest Economics FOREST HARVEST DECISIONS INSTITUTIONAL ARRANGEMENTS FOR FORESTRY ‘TIMBER HARVESTING FROM NATIONAL FORESTS SUMMARY Marine Resources CURRENT PROBLEMS IN MARINE FISHERIES U.S. FISHERIES MANAGEMENT INSTITUTIONS MODELING A FISHERY EFFICIENT RATES OF EFFORT THE PROBLEM OF OPEN ACCESS APPROACHES TO FISHERIES MANAGEMENT UNCERTAINTY AND FISHERIES MANAGEMENT SUMMARY Land Economics SOCIAL EFFICIENCY IN LAND USE LAND MARKETS AND PRICES PUBLIC POLICIES AND LAND USE LAND-USE ECONOMICS AND THE “TAKINGS" ISSUE LAND RENT AND PRICE GRADIENTS THE ECONOMICS OF URBAN SPRAWL LANO MANAGEMENT ISSUES ON THE URBAN/RURAL FRINGE LAND USE IN UNCERTAIN ENVIRONMENTS MANAGING PUBLIC LANDS. SUMMARY Water Resources WATER USE IN THE UNITED STATES WATER LAW IN THE UNITED STATES WATER PRICING INVESTING IN WATER SUPPLY SYSTEMS WATER RIGHTS TRANSFERS AND MARKETS. INSTREAM FLOW PROTECTION SUMMARY 210 213 215 219 222 224 237 238 230 242 aa 245 2a7 251 293 258 261 262 265 207 299 an am 279 200 282 204 208 290 293 294 296 208 a 31616 wv 8 19 SECTION Vi. Economics of Agriculture HISTORICAL CHANGES IN SUPPLY AND DEMAND INCOME SUPFOAT POLICIES IN AGRICULTURE WETLANDS CONSERVATION ECONOMICS OF PESTICIDE RESISTANCE THE ECONOMICS OF MONOCULTURE THE ECONOMICS OF SOIL PRODUCTIVITY ‘SUMMARY Economics of Outdoor Recreation ‘THE DEMAND FOR OUTDOOR RECREATION RATIONING USE ECOTOURISN SUMMARY ‘The Economics of Wildlife Management WILDLIFE ECOLOGY AND HUMAN INSTITUTIONS ‘THE ECONOMICS OF SPORT HUNTING. WILDLIFE IN SUBURBAN AREAS DISTRIBUTIONAL ISSUES IN FESTORATION AND PREDATOR, ‘CONTROL PUBLIC POLICY ANO WILDLIFE MARKETS SUMMARY ‘The Economics of Biodiversity Preservation ‘THE ENDANGERED SPECIES ACT THE NOAH PROBLEM (COST-EFFECTIVE BIODIVERSITY PRESERVATION COSTS OF DIVERSITY PROTECTION SUMMARY NATURAL RESOURCES IN DEVELOPING COUNTRIES Natural Resources and Economic Growth THE INSTITUTIONAL/DEMOGRAPHIC CONTENT RESOURCES AND GROWTH: TWO PERSPECTIVES HOW ECONOMIES GROW NATURAL RESOURCE ACCOUNTING 334 298 38 341 34s 3e7 357 361 364 265 37 379 et 385 386 391 392 08 a3 416 417 410 420 423 426contents 21 ‘THE CONTROL AND MANAGEMENT OF RESOURCE RENTS THE VOLATILITY OF RESOURCE RENTS IN DEVELOPING COUNTRIES LAND RENTS AND LAND REFORM PROJECT EVALUATION SUMMARY Natural Resource Decisions in Developing Countries INCENTIVES AND POLITICAL POWER, PROPERTY RIGHTS: DEFORESTATION ‘SOIL EROSION AND SOIL PRODUCTIVITY LOCAL AND NONLOGAL RESOURCE INTERESTS ‘SUMMARY INDEX 428 492 493 437 aa 444 46 “a7 482 457 400 463 487PREFACE (One of the major themes of human concern as we launch into the next millen- rium is how we should shape and manage our relationship to the natural world. On one side of the issue are those who believe that we are exhausting and degrading natural resource endowments to such an extent that the future welfare of the human community itself is threatened. On the other are those ‘who believe that the technological and institutional challenges of natural re- source scarcity can be overcome given sufficient amounts of human effort and ingenuity. Most people are probably somewhere in the middle: concerned but hopeful Wherever one stands on the ecological spectrum, itis clear that future out- comes depend to a great extent on the human decisions that are made about resource use. Natural resource economics represents one way of framing and analyzing these decisions. By “analyze” we mean developing an understand~ ing of why resource Hecisions are made the way they are and how they might be improved upon. Natural resource economics focuses on resource valwation, economic incentives, and the institutional arrangements that will give us the utilization and conservation decisions we want. ‘The basic structure of the book is to start out with a few preliminaries, then cover some fundamental principles of economics, discuss how these principles apply to the general question of natural resource use, and then move to a se- ries of topical chapters—each of which treats a particular natural resource. Fi- nally, the last two chapters look at natural resource issues as they are encoun- tered in developing countries. There may be too many chapters to cover in a single semester course. In this case it should be easy to cover the basies, andxiv PREFACE then select the applications chapters that instructors and students find most interesting and relevant. Each chapter ends with a summary, list of key words, some questions for further discussion, a brief reference to some sites on the worldwide web that might be useful, and a short list of selected readings. Neither the selected readings nor the web site lists are comprehensive in any way. Given the mas- sive proliferation of sites on the web and the large scientific literature on nati- ral resource issues, the lists at the end of each chapter can cite only a tiny frac- tion of the material that students might find interesting and informative. They are meant simply as a way to help students get their feet in the door, should they want to push further with any of the ideas of the chapter. in this sense the book is a companion to my earlier work, Environmental Eco- nomics: An Introduction (McGraw-Hill, nd edition, 1997). The latter treats is sues of environmental pollution and the management of environmental qual- ity in the same fashion, and has found a wide audience. Its used primarily for introductory courses, but on occasion also for more advanced courses. My hope is that the present work will find the same niche. ACKNOWLEDGMENTS Like most textbooks, this book is the result of many years’ teaching in the classroom. So my deepest debt is to the thousands of students who have sat in my classes over the years. Without their faces, reactions, and feedback, the book could not have been written, and if [have been able to present the mate- rial in a way future students find comprehensible and meaningful, it is all these earlier students who can take most of the credit. Many thanks to the economists who have read all or part of the manuscript and offered their comments: Anne E. Bresnock, California State Polytechnic University; Richard Bryant, University of Missouri; Nick Gomersall, Luther College; Douglas Parker, University of Maryland; and Keith Willet, Oklahoma State University. Their insights and reactions have made the book much better than it would have been without them, ‘Very special thanks to the people who helped me produce the book: to Dar- leen Siysz, for her incredible work with the word processor and keeping the project organized, and to Eileen Keegan for her fine work with the graphics. Thanks also to Lucille Sutton, Joanna Honikman, and David Sutton at McGraw-Hill, who saw the book through to completion. \— Finally, deep thanks and love to Martha, who read every word more than once, who encouraged me onward, and who kept trying to explain to the kids why dadcly had to write all those wordswow ONE INTRODUCTION ‘This first section contains two introductory chapters. Chapter 1 offers a brief tour through some of the major natural resource issues facing us today. The objective is to become acquainted with them in commonsense terms before we Iaunch into an analysis of these problems in later chapters. The second chapter covers some of the essential terminology that will be used throughout the book.CHAPTER, IMPORTANT ISSUES IN NATURAL RESOURCE ECONOMICS In this book we apply some relatively simple, but péwerful, economic princi- piles to the study of natural resource conservation and use. The emphasis will be on analysis: why resources are used as they are, and what specific steps can be undertaken to use them at a rate that is socially beneficial for all. It may sometimes seem that the emphasis is more on refining the analytical principles than on applying them in useful ways. To underline the fact that the analytical models are not of interest per se but merely allow us better to come to grips with real-world problems, we start by taking a brief, descriptive excursion through a number of important contemporary natural resource issues. The aim, in other words, is to get an overview of the kinds of problems that are dealt with in natural resource economics, before launching into the study of the analytical tools that are brought to bear on them. NATURAL RESOURCE ADEQUACY ‘The longest-running issue in natural resource economics is undoubtedly the resource adequacy issue. Given that contemporary economies use relatively large amounts of many types of natural resources as “inputs” to production and consumption, we must ask ourselves a few serious questions: Will future supplies of these resources be sufficient to support the economic needs of ourCOHAPTER 1 IMPORTANT ISSUES IVNATURAL RESOURCEECONOMICS 3 children, grandchildren, and succeeding generations indefinitely? Or will natural resource shortages ultimately become so severe as to threaten, and perhaps lead to a collapse of, future standards of living? This is not a new concern. Before the industrial revolution, when economies were tied more closely to local resource endowments, fears of local shortages of items such as wood and water were very common. When the industrial rev- olution did arrive, with its heavy reliance on coal, concern shifted to the possi- bility that that resource, since it was nonrenewable, would grow scarce and cause collapse. Jin more recent years, the energy crisis of the 1970s provoked a great deal of soul searching and dire commentary about resource scarcities and economic collapse. It is true that modern economics uses prodigious amounts of energy per unit of output; that is, they are very energy-intensive. But the runup of en- ergy prices of the early 1970s was in fact a political phenomenon, not con- nected at all with real scarcity factors, Furthermore, the price increases led to very important amounts of energy conservation, as users sought ways to re- duce their energy consumption, By 1990, unfortunately, few people still gave ‘much thought to energy conservation, sirice the real prices of such important items as gasoline had declined to pre-1970s levels. But the dilemma still remains. The largest part of the energy system of the western world is based on nonrenewable resources: petroleum, coal, and natu- ral gas. Has the inevitable crisis in energy supplies, and by extension other critical natural resources, simply been pushed off into the future? There is probably no way of answering this definitively to everybody's satisfaction. People who think about the likelihood of a natural resource scarcity-induced economic collapse tend to distribute themselves along a spectrum running from extreme pessimism to extreme optimism. The pessimist side goes back at least to Thomas Malthus, whose famous treatise on population was based on the notion that human population growth would inevitably outstrip the ability of nature to provide sustenance in ever- increasing amounts.! In the early 1970s an influential work on the pessimist’s side was published titled The Limits to Growth? This study used large-scale ‘computer simulation models with complicated feedback mechanisms to arrive at the conclusion that natural resource scarcities, along with several other fac- tors such as increased pollution, would lead to precipitous declines in the out- put of modem economies, beginning early in the twenty-first century. And pessimist studies continue to appear 1,8. Maths, An Essay on Pepulaton, London, 1798 2 Danela H. Meadows ea, Te Lint fo Grote A Report for the Cab of Rome's Project on the Preise of Mankind, New York, Universe Book 1972 SA recent one is Mark Hlertgnard, Earth Odyssey, Around the World in Seirch of Our Emin rental Future, Broadway, BOD, 109,4 SecTION ONE, wrROBUCTION ‘The pessimists can point to history to support their view. George Perkins Marsh, in his influential historical study? of the relationships of humans to their natural environments, begins with an allusion to the Roman Empire: ‘The Roman Empire, atthe period of its greatest expansion, comprised the regions of the earth most distinguished by a happy combination of physical advantages, ‘The abundance of land and water adequately supplied every material want, minis- tered liberally to every sensuous enjoyment. . .. If we compare the present physi ‘al conditions, . . . we shall find that more than half oftheir whole extent... is tither deserted by civilized man and surrendered to hopeless desolation, or atleast ‘greatly reduced in both productiveness and population, At the other end of the spectrum are the extreme optimists. Natural re- source scarcities will surely occur in the future, they admit. But human beings have the capacity to overcome this challenge, largely by finding substitutes for resources that get scarce and by eventually bringing population growth, under control. ‘The optimists can also call upon history to support their position. When England began to experience severe wood shortages, along came coal technol- ‘ogy upon which to build the industrial revolution. When coal started becom- ing scarce, petroleum technology was developed. When serious food scarcties threatened the burgeoning populations of Asia, the green revolution was ini- tiated to increase food production potential. When domestic energy prices in- creased rapidly in the 1970s, American producers and consumers demon- strated a surprising ability to adjust technologies and behaviors so as to conserve energy. In other words, history provides many examples of technol- ogy shifts and resource conservation in the face of increasing natural resource shortages. This has led many people to be optimistic about our abilities to re- spond, without catastrophic results, to natural resource scarcties of the future. Of course this does not rule out the need for many local adjustments that will be burdensome in the short run, especially to people whose livelihoods are tied directly to supplies of the scarcer resources. Perhaps it is fair to say that most of us lie somewhere between the extremes on this issue: We are concerned, certainly, but there is a sense that this is not a situation that we are incapable of ameliorating to a large extent if the right steps are undertaken. This brings up a further question: How are we to know. when real natural resource scarcity is about to put a seriouss crimp in economic: welfare? To be able accurately to forecast when some essential natural re- source will become seriously restricted in supply, we would need complicated 4 George Perkins Marsh, Man and Natur, 1864, Belknap Peess of Harvard University Press, (Cambridge, MA, 1955, pp. 7-9. 5A good early example ofthe optimist school isthe epost put out by the Hudson Institute, a think tank specializing in trying to discera future tends; see Herman Kahn, Willa Brown, and ‘Leon Martel, The Next 200 Yeu, Nuw York, William Morrow ane Company, 17% A mare recent optimist work is Julian Simon, The Ultimate Resource 2, Princeton University Press, Prinecton, NI 1896, |CHAPTER | (PORTANT ISSUES IN NATURAL RESOURCE ECONOMICS 5 models incorporating predictions about population growth, the rate of techno- logical change, the rate of new discoveries, and so on. It is very difficult to ‘build economic models that explicitly account for all these factors, Long-Run Price Changes But there is another way, Many natural resources are traded on organized markets; most of these are international in scope with hundreds of partici- pants on the demand and supply sides of the markets. All the different views held by these participants regarding the present and future demands and sup- plies of the resources in question ge! registered on one element of the market, namely, the price af the resource. Resource prices, in other words, tend to dis- till out the preponderant views about present and future resource scarcities.® ‘Thus the main focus of resource economists in-the-study_of natural resource scarcities has been to examine the historical paths of the prices of these re- sources. Rising prices would signal increasing scarcity, whereas steady or de- lining prices would signal the absence of scarcity. Actually, there does not seem to be any long-run tendency for natural re- source prices—at least prices of the traditional resource-type commodities—to increase. It is more generally true that prices have historically decreased, de- spite the huge demographic growth that has taken place over the last few cen- turies. Some prices have shown temporary rises, but the long-run trend has been downward. The primary reason for this has been massive technological change in extraction, transportation, and refining. Whether we can expect the indefinite continuation of technological transformations to the degree we have enjoyed in the recent past is a much debated issue. Natural Resource Substitution A key relationship within the long-run scarcity phenomenon goes under the prosaic name of natural resource substitution. It is perhaps a human trait for living generations to project thoughts of permanence onto situations that are, especially in the long run, quite changeable. Familiarity with contemporary technologies leads us to discount the idea that the situation could be very dif- ferent. But over the long sweep of history, patterns of natural resource use have changed dramatically, at least in the developed world. What history shows is a series of large and small natural resource substitutions in response to changing conditions of scarcity and price. There is every reason to believe that substitutions in the future will work toward relieving future resource shortages. One possible example is discussed in Exhibit 1-1. This is the substi- tution of salt water for freshwater sources to provide for the needs of humans. + ocoue ter actos so tat pes we mut bce in ying to ently a cary sig inal ie sonnet he rere at srs pos wll ay 9 any ervconneral cone ote exencion acer het wil beeen por init yeustcome6 SECTION ONE: INTRODUCTION EXHIBIT 1-1 DESALINATION: AN INCREASINGLY POPULAR OPTION Areas with water shorlages, especialy in through a sereen that filers out both sus- tigrincome counties, are fuming increas: pended and dcolved sols, Reverse os- ingly to desainaton plants to supplement mone climbed lo about 31 percent cf tll valor resources In tho 1960s, the rumber global capactyby 1860, up om 20 percent ot plans producing mare an 00 cuble i 1904, Imeters por day creased cramaticaly, om Deealination is sl tvee to four Yes 53627 plants n December 196 107.598 more expensive than converional sours plans operating in 120 counties mn Docem of fesh water, costing 40-60 cents per bor 1050. A hatte, global capacity (ol. 1,000 Its of brackish water and $1.05 1 thor installed oF contracted) was estimated §1.60 per 1,000 Iters of soa wator. As ha a neary 13.3 milion cute meters per day, technology improves, however, and the Tough Y24eld increase since 1970. coe of convencna freshwater inoreases, esatnation pants ere now comman in desalination plants are tiely to become areas that can afford the relatively nigh more popular and the costs are likely '0 ost such as Saud Arabia, Kuwall, and contin fo deaine shy. Tere ls greaty South Fonda, Meesured by percentage of increased intrest, or exampe, In bull {otal global capacity, Saud Arabia is the dilaton plans longa electc Wit world leader with 27 percent; followed ad using the waste heat tom power gen by the United States, 12 percant Kuwait, eralon to dive the desalination process. 1 percent and the United Arab Emvates, About 69 ereant of ll pans are teat 40 porcon ing sea wator and 27 percent are Weaing titge plans, such asthe millon cubic breclsh water. Desalination plants ar i motor por cay Jubal plant In Sauch Arabia, cresingly Bang Used for applications char Usualy use the dilation proces, which fan removing salt, such a8 tho Weatment ot Est waters heated and the resiltng seam effluent waters, of river water to obtain Condenses int resh water The main dst. waler for bolers of groundwater that has fation process—ine mullltage flash been polvied by nirates and pesticides, process has decned from 67 percent ot and of municipal water to make ulrapure {al eapacty in 198¢1o about $6 percent nwa for the elo aus 41969, butt sit plays a significant role in verylage plants end'india-pupose plans, Sowes: From Word Resourses 1098-68, Coupled with power generation. Smaller S22 the Gita Enannen! oy Wai Plans tpicaly use reverse osmosis, wich Seyess tw, Ueed by pernesoh of er Uses high pressure to force salt water Unrersy Press ine ‘The future will probably see a further drop in the costs of desalination, and as this happens the shift to the oceans for our water supplies will have vast im- | pacts, economically and politically, on current water supply systems. Substitution occurs not only among resources, but also between natural re- sources and other types of inputs. In fact resource conservation can be thought of as a particular type of substitution. During the 1970s, high energy prices en- couraged a great deal of substitution, in this case of capital-type inputs (-g., new energy-saving machines) for energy inputs, which produced a substantial amount of energy conservation. A major role for natural resource economics is to study the future potential for scarcity-mitigating resource substitutions,CCHAPTERL1: IMPORTANT ISSUES iW NATURAL RESOURCE ECONOMICS 7 SOCIALLY OPTIMAL RATES OF RESOURCE USE ‘Asa way of coming to grips with the issue of whether society is using its natu- ral resource assets wisely, looking, at long-run trends in resource prices may seem rather indirect. A more satisfying approach might be to focus on the rates at which particular resources are used and to try to answer the question of whether these rates are the best ones from the standpoint of society. The study of socially optimal natural resource utilization rates is a major part of natural resource economics. “Optimal” means “best” according to some speci- fied criteria. Optimal use rates depend on many factors, such as the value of the resource in alternative uses, rates of natural replenishment, environmental factors, expected demographic and technological trends, and so on. The chal- lenge to those who would study these niatters is to use theories and models that will capture the important complexities of the real world, but give results that are comprehensible to the average person.” Exhibit 1-2 illustrates some of the difficulties of trying to determine optimal utilization rates, The problem here is setting annual catch rates for particular fisheries. One concept that fisheries biologists and administrators have used is maximum sustained yield, the maximum allowable catch that can be sus- tained over many years. But fish stocks may fluctuate from year to year for a variety of reasons. So an allowable catch that is reasonable in a year of relative abundance may not be in years of scarcity. From an administrative political standpoint it may not be possible to vary allowable catch rates annually: The pressure will be to set the rates at the same level for a period of years. For a fisheries administrator the problem is how to set long-term catch rates in a fluctuating ecosystem. ‘Again, the relevant criterion for evaluating natural resource use rates is social optimality. But society is composed of many people and groups, and what is optimal for one may not be so for another. Ifa decision or course of action is so- cially optimal, it presumably means that itis the best, taking into account all the expected consequences and implications flowing from the decision or action, In later chapters we will try to give substance to this somewhat abstract notion. IDENTIFYING THE SOURCES OF NATURAL, RESOURCE MISMANAGEMENT ‘A natural extension of identifying optimal natural resource use rates is the issue of diagnosing the reasons why actual rates of use are often not optimal. ‘The job here is one of studying the causes of resource mismanagement. To diagnose instances of mismanagement calls first for a specific criterion that can be used to recognize cases of mismanagement. In economies the primary criterion is efficiency; a second one of great importance is equity. A natural 7 In economics» “model” isa simplified way of depicting how sinporiant factors (eg, resource ‘se rates, technical ange, population growth) are interrelated and how chariges in One factor can afect changes in others.8 SecrIONONE: INTRODUCTION EXHIBIT 12 UNCERTAINTY, RESOURCE EXPLOITATION, AND CONSERVATION: LESSONS FROM HISTORY Donald Ludwig, Ray Hiborn, Cart Waters For some years the concept of maximum destruction of resources. Many practices {udainod vied (MSY) guided efforts st fs1- continue even in cases where there fs abun- fries management. Thare is now wide- dant scientic evidence that they are ul- ‘Spread agroornont that tis concept was un- mately destructive. An outsiandng example fortunate, Larkin concluded that fisheries the use of irgaton in arid fnds. Approx ‘ciontists have been unable to contre the mately 3000 years ogo in Sumer, the once Technique, distibuton, and amount of fishing Righly productive wheat crop had to bo re- foto. The consequence has bosn the elm placed by baray because barley was more nation of some substocks, such as herring, _sallesistant. The say soll was the resut of (od, ocaan porch, salmon, andlake rout Ho rigllon.E. W, Higard pointed out in 1898 ‘Concluded that an MSY based upon the tha the consequences of planned iigation lanalyis ofthe historic staistes ofa They in Calfonia would be sila Mis wamings is nt atinabe on a sustained basis. Sup. wore not heeded. Thus 3000 yeas of oxpe- pot for Lacks view Is provided by @ num- ance and @ good scientific understanding bor of reviows ofthe Risto of fisheries Few of tho phenomena their causes, and the ap {sheries exit steady abundance. propriate prophyactic measures are not Sut Harvesting of ireguar or ficiuaing re- ficient to prevent the misuse end conse souroos i subject toa ratchet ote: during quent destruction of resources. felatively table porods. harvesting rates Poltcalloacers at levels ranging trom tend to sablize at postions predicted by world summits to lal communities base ‘stoady state biosconomic theory. Such lev. Wel policies upon a risguided view of the ts aro oflon excessive. Than a taquence of dynamics of resource exploitation, Sclen- {0d years encourages additonal invest: sl have been activo in poining out env fmont in vessels or processing capacity. ronmental degradation and consequent ‘When conditions return to normal or below hazards to human ie, and possibly to ite ‘oral he Industry appeals tothe gover- as we know it on Earth. But by and large tment for help: oten suostantal Investments the scientific community has helped to per land many obs are at etako. The govormmen_patuate the iusion of sustanable develop fal response typical eect orindrect mont trough scientific and technological Sides, These may bo thought of inal ae progress. Resource probiems are not relly fomporary, but tol effect Is 10 encourage envrenmental problems: Thay are human ‘vernarvestng. Te falhet effects caused problems that we have created at many by the lack of inition on Invstments dur- tines and in many places, under a varity ing good portods, But sang pressure not to of pllical, socal, and economic systems. dsinvestGurng poor periods. The longterm ‘outcome i a heavily subsidized inst that es ae Sn: Rei wn pein om So Solenile certain and consensus in Sarge Anorce Asean he os Bavaro self woud not prevent everexpiotation nd merit Seance. resource is being managed efficiently if it is producing the maximum net value to society. "Producing" in this case means more than conventional ex- tractive activities; it also includes values that resources produce when they are not used in traditional ways, but rather are conserved for ecological pur- poses or other nonextractive roles. A natural resource is being used equitably‘conowes 9 CHAPTER») PORTANT ISSUES IN NATURAL AESOURCE if the distribution of the net benefits flowing from its use is regarded as fat Economic analysis can identify situations that are efficient; judgments about ‘what is fair must come from the political system. Tin a market economy, natural resource mismanagement can arise from two ‘major sources: (1) the difficulties private markets encounter, in some circum stances, of functioning efficiently, and (2) misguided public policy and public regulation, “Exhibit 1-3 discusses three cases of misguicled policies in the United States. They deal essentially with the way laws have been used to subsidize users of natural resources on the public domain, In many cases this happens because laws that were originally enacted for one purpose stay on the books even though conditions change. So a mining law, for example, that may have been reasonable when it was enacted in 1872, has become a means of subsidizing ining operators because conditions in the industry are vastly different now, ‘hile the law remains unchanged. And because the subsidies create powerful political constituencies, present-day legislatures are unable to change the laws. “Throughout the book we will encounter many cases like this, where public resources policy enacted at one point in time, or in the pursuit of certain objec- tives, has had effects that are inefficient and /or inequitable. Likewise, we will encounter situations where private markets, left to themselves, will lead to natural resources mismanagement. This obviously creates a dilemma. If pri- vvate natural resource markets are functioning inefficiently, but effective public policy is too hard to get, what do we fall back on? We obviously have to fall back on making choices between imperfect alternatives—an idea we will deal with throughout the book, PRESERVATION VS, EXTRACTION: VALUATION.” OF THE ALTERNATIVES In their ancient, historical role, natural resources were thought to be merely raw materials to be extracted or otherwise physically converted or used to support economic growth and the advancement of material welfare. They were regarded as inputs to fuel the economy and the production of the full range of goods and services desired by consumers. They still play this role. But in recent decades another role has become widely recognized and appreci- ated: the value of natural resources in terms of the nonextractive services they provide—scenic values, support for outdoor recreation, biodiversity preserva- tion, and simply the preservation of a meaningful natural heritage! ‘The opposition between the motives of extraction and preservation has pro- duced some monumental conflicts in this century. One of the first and best known was the fight in the early years of the century over converting the Hletch-Hetchy Valley within Yosemite National Park from a scenic natural wonder to a massive dam and reservoir to supply water to San Francisco. A similar fierce debate occurred in the 1960s and 1970s over the construction of a dam in Glen Canyon, Utah, that changed a place of great natural beauty to a10 secTiow ONE: iwrRooUCTION ExHiBIT 1-3 (One important factor leading to excessive natural resource use can be public subst sls that go to natural resource users a a result of past resource policies. The follow Ing is rom the Economie Report of the President, 1997, Curren policies toward natural resource use are mainly rooted in past legisation in tended to stimulate the economies of the West and encourage settiement ofthe re- ion. These policies facitate the develop ‘ment and exploitation of natural resources. Subsidized Use of Federal Public Lands. Most uses of Federal public land are currently subsidized in one of a last three possible ways. First, a subsidy can exist ‘when the price to the user is less than the ‘government’ cost of overseeing tho activ. ity, Second, a subsidy may exist when Users of Fedaral lands pay the government ‘8 pice below that pad for the similar use ot comparable privatoly owned lands. Finally, resource users may receive a subsidy if they pay the government lose than the op- portunity cost ofthe Lana's use, which i do- fined as the value of the highest alternative use ofthe resource. The fype and amount of subsidy offered on Fedoral lands vary withthe nature of the activity and with the locaton of tha land Public grazing foes are almost always bbolow private foes and may not even cover tho governmant's coat of administarng the ‘grazing program. “The subsidy offered to ranchers Is smal, however, compared with that given to min: 8 taking hardrock minerals such as gold ‘copper, sivar, and uranivm: miners do not pay he government ay signicant revenue (oF fee for hardrock minerals extracted from PUBLIC SUBSIDIES AND NATURAL RESOURCE UTILIZATION Federal public lands. This polley, estab- lished in the 1872 General Mining Law, be- stows @ large subsidy on private mining companies, Timber extraction from Faderat public lands is also subsidized, athough the sub- sidy is more subtle than those for mining and grazing. Generally, tho USFS subet~ ‘izos timber exracion trom pubke land by collecting ess in tbor sale revenvee than it spends on timber program costs, Federal water projects constructed and managed by the Beau of Reclamation, the ‘Aumy Corps of Engineers, and the Natural Resource Concarvation Sevice ofthe U.S Dopartmant of Agriculture area highly suD- sidized, For example, projects constructed by the Bureau of Reclamation embody 2 numberof cifernt subsidies, These include interest tree repayment for capital invested In inigaton facies, limitation on ropayrant association with “abilly fo pay” quidein that do not necessarily reflect changing eco- omic or market condtons or nviuals come, and the repayment of costs above an Inigator’s estimated abiity 0 pay by using hydropower revenues far inthe tatu, Recreational use of Federal public lands 's also heavily subsidized: in many areas fees paid by recreational users do not cover the costs of maintaining the resource for recreation. The Park Service sponds around $250 milion annually to provide i= {or services at its 974 parks, monuments, land Fstorc sts. Entrance fees raise cay 860 milion annually Source: Economic Report of th Presi, Government Prining Ofice, Washington, D.. 1907. 26-218 large flat-water recreation area. Conflicts continue today: the cutting of old: growth forests vs. preserving endangered species; the drilling for oil in desig. nated wilderness areas; the expansion of ski resorts vs. the preservation of for- est habitat; the growth of off-road motor vehicles vs. the preservation of natural peace and quiet, and so on.CHAPTER 1 IMPORTANT SSUES IN NATURAL URGE ECONOMICS 11 In the extraction/ preservation debate there are a number of important tasks for resource economists. One is to try to look deeply into the basic nature of the choice that confronts society in these cases. Preserved resources are usu ally unique; extracted resources usually are not. Extraction often results in ir reversible changes of natural resource assets; preservation normally does not. In light of these factors, normal principles of rational choice may suggest that we adopt conservative decision strategies that will prolong our natural re- source options. We will discuss this topic at greater length later in the book Another important role for economics in these cases is in valuing the con- sequences of the preservation option. Extracted resources are normally (not always) sold in markets; think of petroleum, timber, agricultural land, and commercial fish. The values that society places on these resources are regis- tered in market prices for such products as oil, wood, and land. These are often well-organized, competitive markets where prices reflect the give-and- take between consumer desires and natural scarcities. The preservation op- tion, on the other hand, usually does not involve the market. In many cases this is a problem to be rectified, and one of our tasks will be to explore new possibilities for market-based resource policies, But another critical task is to develop and apply analytical tools to measure the value of nonmarket re- sources, for example, resources such as ecosystem services, which do not move through markets. Resource economics has developed some special tech- niques for doing this, as we shall see AA third important contribution that economics can make to this debate isin assessing the economic consequences of shifting resources from extractive to preservation uses, especially the consequences in terms of the distribution of costs. Programs to reduce or change the extraction rates of particular re- sources will usually have important impacts on the extractive industries formed for this purpose. Proposals to reduce timber harvesting in a certain re- gion, for example, will impact people in transport and mill operations in that region, Plans to reduce fishery catch rates will require cutbacks in employ- ‘ment in the fishing fleet. Very often the costs of preservation programs are dis- proportionately bone by relatively small groups of people. It is important for economic analysts to identify this situation when it exists and to help provide the data and analysis on which compensation might be devised PROPERTY RIGHTS AND NATURAL RESOURCES. How people use, and abuse, natural resources is not simply a technological ‘matter, but more importantly a result of the economic institutions? that guide ! This doesnot preclude that economists are advocates for one position or another, but that i ‘esentally apolitical role, nolan analytical one *""Eegnomic institutions” refers broadly to the rules and organizations that govem economic activity in any particular society. Such things as laws governing Property nights nd commercial transactions, court systems, patent and copyright laws, and policy organizations like legislatures and regulatory agencies are ll examples ol institutions32 secTION ONE: INTRODUCTION our decisions and behavior. Especially important in this respect are property rights institutions: the laws, customs, and regulations governing the rights of people to have access to, and utilize, natural resources of different types. All human societies have property rights institutions, though not necessarily the same ones. How different property rights systems affect human uses of natu ral resources is a major issue in natural resource economics. One important topic is how different types of property rights—public or private, individual or collective—affect the types of uses to which natural re~ Sources are put and the resulting rates of utilization. Another important prob- Jem is how the physical features of different natural resources (eg, the fugi- tive nature of wild fish or the regional variations in water abundance) affect the property rights that are most appropriate to the resources. A third is how new types of property rights might evolve to help resolve certain difficult nat- ural resource problems. Exhibit 1-{ discusses an example of the latter. It deals with the shift from an. open-access system of fisheries management to one based on private property EXHIBIT 1-4 RIGHTS-BASED FISHING: TRANSITION TO A NEW INDUSTRY North Atlantic fisheries off New England and maritime Canada have collapsed, and throughout the world viel from many ocean fiehing grounds are dockning preciitousy. Reversing he process may require abandoning the tradtion of tree anid open access fo the ‘ocean's resources In exchange fora "losed-access” system based on property righ, ‘The stay Is certainly not nows: many of the seas. As a resuit of overtishing, 100 many world's ocean Tisheries aro boing pushed fishermen and manutacturors now pursue toward possibly ruinous declines. True, and process fewer and fewer—and gener. we have yet to 880 skyrocketing prices of aly smalior—specimans. long lines at the seafood counter. Long- Broad command-and-control regulatory ‘tablished fishing communi, however, approaches, typically based on some ver- ‘ar0 trreatoned, as are some traditonal, ofton sion of open access, cleary are not work ‘centuries-old ways of life. Sporadic armed ing. Management areas, fr instance, seem Confct has even broken out In some tetito- tobe too large to reflect accurately the local tial waters. And the equllitium of coastal conditions and interests of the fishermen ‘marine ecosystems, already taxed by polu- themselves. Even when control has been tion and other development prassures, i fur- regionalized, asin the United States with its ther threatened by progressive decimations nine rogionalfisherios management coun ‘of many marine species and populations, cls, the decsionmaking powors tand to re Many Americans may be aware of the side in those wth vested interests in short collapsed Nortn Atlantic fisheries off New term gains rather than the long-term health Englana and martime Canada. The px0- of the fisheries. Qoean fisheries manage: Jem, though, is global and growing, and we ment needs the cooperation of those who know why overishing, The practice results work the seas, much of the preservation of fom the traiton of [ree and open access torrestal biodiversity and ecosystom man. to fishery resources that itself slems from agement require the willing assistance of the tractonal principle af freedom of the private landownersCHAPTER 1. IMPORTANT ISSUES IN NATURAL RESOURCE ECONOMICS EXHIBIT 1-4—Continued FIGHTS-BASED FISHING: TRANSITION TO A NEW INDUSTRY Would creating and using propery rights ‘among fshermen work to conta beth open ‘access and overcapacity—and, thereby, foverfshing? Systems could be designed 10 ‘set quotas on catches permited o tthe umber of icentes fssved. Such systems have in tact been used around the globe wth incressing frequency since the 1870s, but most at iccal and regional levels. Such righis-based fishing assumes that fshor- men, i allowed exclusive use rights and thus inoluded more directly in fisheries management decisions, wil leary see the benelits of managing for the long-term heath and productivity of thir series. Exclusive user rights have long been used by small-scale local fishermen with fishery resources adjacent to their own ‘community, especialy for relavaly sedon- tary animals ike shellsh. Expanding this to larger fsheries and mare motile sealife ro ‘mains a challenge (although tuna compa hes In the Philipines have successtully controled local access by limiting the type Of fishing gear usec). The goal in al cases, ‘though, Is fo convey more authority for the use of a fishery, including monitoring and surveilance, to ts primary use "New Zealand has become the leader in 1TQs (navidual ransterrable quotas), wth thiny-two species-specific agreements ‘Asttali ea close secant division with ‘Japan of much ofthe scuthem biefin tuna, fishery is ilustrative. Using relatively low quota allocations, many In the Australian Part of tho tshery had to decide whether to buy more quota or sel out. Inthe two years following the start ofthe ITO system for that fishery, he number of boats in use dropped by 50 porcent. Researchers estimated that the capital so employed in the boats was $10 to 512 milion less than under other management schemes, The system aso for ‘cused catches on larger, more valuable specimens, withthe vale ofthe catches in ‘croased thes: to fourals Some Probleme Unfortunately, byeatch—the inadvertent capture of unscught species —is not neces: seriy reduced substantially hough qu {ould be sot for bycatch to encourage fish- fermen to work other areas of the fishery with loss bycatch potential or (in some ish eres) to invest in equipment that would minimize bycatch. Also, the introduction of {8 propery-rghts regime does nat immed atoy, or even necossarly,resut ina love! Ing out of the rato of fishery stock deploton ‘And those fig that move between tho bio- logically arbitrary 200-mile-wide toritoral waters and the high seas present another challange to property-rights regimes, much as they do tothe present system, Enforcement also remains a problem, with the intrusions of foreign boats ang fleets especially vexing. Poaching may ways be with us, and assigning survilance and monitoring to property owners seems unlikely to change that Even more damag ing and dificult 10 resolve can be legal ish- ing at the very edges of the 200-mite limit, Small-scale fishermen looking ever-tarthar afield can so intrude, as can “pirat trawlers using legal equipment such as fine-meshed nets. Usually, however, the legal Industial fleets of huge trawlers pres: lent the greatest challenge. Designed 10 catch and process a ton oF more per ROU, these giants can etfecivaly dean out much of any fishery. Negotiating ard enforcing n- temational agreamants may prolang the ull ‘transition toa rights-based industry. Souce: Adapad tom Resouces fo he Fur tre, Reaoureas, lve Yaa, Summer 1096 Feprinted y prison,14 section oNe: wrRODUCTION rights. Ocean fisheries have historically been treated as an open-access re- source: The fish are converted to the ownership of whoever gets there first and puts the most effort into catching them. This has led repeatedly to overfishing. and reduced fish stocks. The system of individual transferable quotas (ITQs) is an attempt essentially to create marketable property rights in fish. If it works, it could lead to reduced pressure on marine resources by taking advan- tage of the normal incentives that owners have to preserve the values of their assets, We will discuss this in detail in Chapter 19. ‘THE USE OF BENEFIT-COST ANALYSIS IN NATURAL RESOURCE DECISIONS In 1966 the US. Congress enacted a law aimed at preserving endangered species." It authorized the federal government to purchase land for the con- servation of threatened species and the protection of their required habitats “insofar as possible.” The language in which these statutes were written in ef- fect allowed the relevant public agencies to make what they regarded as “bal- anced” decisions on species protection, weighing the apparent benefits of cer- tain preservation decisions with the costs of these decisions. ‘Then in 1973 Congress passed the Endangered Species Act (ESA). This was a time of great activity in federal environmental and resource policy. Advo- cates of new laws and more encompassing public initiatives put great stress on the benefits to be produced by these efforts, and paid relatively little atten- tion to their costs. Thus, the language of the ESA was very different fom the earlier laws; it essentially directed the agencies to protect endangered species rno matter what the cost. Certain amendments of 1978 provided some flexibil- ity by creating a mechanism whereby exemptions could be granted to the strict requirements of the law. The terms of the original act still hold, however, in that they do not permit the Secretary of Interior to take costs into account in making decisions about endangered species. Once a species is listed as endan- gered or threatened, itis supposed to be protected at al costs. But although the political language appears to be unambiguous and un- compromising, real life is more complicated. With goals in conflict, restrictions fon budget resources, and imperfect knowledge, decisions simply cannot be made without compromises and trade-offs. These can be made out of sight, as it were, in the recesses of the bureaucratic process. Or they could be done ‘more overlly, by bringing benefit-cost analysis explicitly to bear. Benefit-cost analysis is simply an attempt to account for and compare, within the same analysis, all the benefits and costs of particular courses of action, It was devel- oped many years ago to evaluate federal water projects like dams. In recent years many people have taken the view that it ought to be applied more broadly to all the natural resource and environmental decisions made in the public sector. Needless to say, this is a controversial issue "a Public Lar 89.669, signed on October 15, 1986CHAPTER 1. MPORTANT ISSUES IN NATURAL RESOURCE ECONOMICS 15 Regarding the endangered species act, benefit-cost analysis would require that economists estimate both the costs of taking action to preserve particular species and the benefits of so doing. The costs are the values forgone if re- sources are preserved for the support of an endangered species. The benefits are the values that citizens place on having the species preserved, adjusted for the probability that the species would survive anyway in the absence of the specific preservation action under consideration. Exhibit 1-5 discusses some of the benefit-cost analyses that resource economists have done on plans to pro- tect the spotted owl. In Chapter 8 we will examine the principles of benefit-cost analysis and some of the techniques that economists have developed for applications in ‘cases of natural resource problems. Although the political controversy will no EXHIBIT 15 ‘THE ECONOMICS OF SPOTTED OWL PRESERVATION pee eee ee aloes eames Somenes arco ren mel Rica easton cae rete eer cents oan es Some eee eceregen ee aes CO ee Sule Leek feta ae ane ce eee een aera uaaots ome protic: faite, aise pam tht Seeet Dante cemcon Saye eaaer mate eee coated ei eee Re cesrenrt eae teoaian ace mater’ Senha peer ee lamas memmees ees scnataeatoce miata ur ecmera nenate eaiae Senses serena eee cera Cais eager nd tt tw Sanaa eee ea ae eeseats eee eee Sines en cen cares erin Woes cette ta te Re yuee| wn ated eau a ery fu ee ses nce: at forest hatitat; some of which, but not all is Groweh Fereste snd ine Spetiou Out: Contempo [uted mcgewt frets Sonar, oes aaa gee16 SECTIONONE: INTRODUCTION doubt continue on the appropriate role of benefit-cost analysis in public pro- grams, the important approach from an analytical point is to keep working, on making it better in terms of its applicability and the accuracy of the results it produces. LAND-USE ISSUES In the ebb and flow of public concern about high-profile natural resource is- sues—like endangered species, mining in national parks, and grazing fees on the public range—it is sometimes easy to overlook one resource problem that is faced virtually every day by communities everywhere: the use of the land. Land is a resource in the sense that itis capable of producing distinctive goods and services; it is also a resource because it is the spatial plane on which most human activity takes place. Humans use portions of the earth’s surface for a myriad of different uses: housing, work locations, roads and other transporta- tion corridors, farms, parks, and wilderness areas. Land is also the critical sup- porting medium for other biological resources of all types. In most countries of the developed world, decisions on how particular pieces of land will be devoted to particular uses are made through a complex mixture of private land markets and public oversight, Land markets in the United States are extremely well developed, with sophisticated surveying, deed registration, title transfer practices, and courts to adjudicate disputes. But there is a long, his- tory of public intervention in land issues, both to provide essential public ser- vices like roads, to regulate the economic and technical impacts that adjoining or propinquitous parcels of land have on one another, and to manage human im- pacts on portions of the natural environment. In doing this, communities have developed a large arsenal of regulatory tools, such as zoning, conservation re- strictions, subdivision regulations, and outright land purchase. The story in Exhibit 1-6 discusses a technique used by many states to try to preserve agricultural land uses. In certain places, agricultural preservation is important for cultural, scenic, and/or food supply reasons, and so efforts have been made to look for ways of slowing the rate at which agricultural land is converted to other uses, such as home lots. The approach is development rights purchase, whereby public authorities purchase only the right to de- velop from farmers, leaving them with the remaining rights on their land and the freedom to farm the land as they wish. This allows some farmers to con- tinue farming but also to realize a large share of the development value of their lands. This clearly improves their financial positions, and the hope is that it will enable them to continue operating the farms. This may be easier be. cause of the tax advantages stemming from sale of the development rights. It is not hard to see how economic analysis has an important rote to play in cases like this. Local land markets are usually very finely tuned institutions; they normally react quickly to new stimuli (e.g., rumors of a new office build- ing going up in town), and they can be very hard to guide in particular direc: tions because of the substantial incentives they give to participants. The effectsHAPTER 1 EXHIBIT 1-6 PRESERVING FARMLAND. COWS IN TRUST PAWLET.VT.—In the southwestern comer of tho stato of Vermont, where mountains ‘ge above farmland and the Mettonee River is ful of tout, Tim and Dot Leach, the own: fers cf Woodlawn Farm, nave decided 19 sell the covelopment rights of their 360-acre airy farm tothe Vermont Land Trust. was rot an easy decion, In giving up thelr ight to sell the land at its markat value, the LLeachos have placed @ conservation ease- ment on it, a legal agreement betwoon {landowner and land rst that reatcts deve ‘opment of the property. They stil own the Jana and their chien wit inher, But Ht ‘must be kept open and avaiable to farming To compensate them, the Vermont Housing and Conservation Board puts a lump sum in the Leaches’ bank account with cash from the stato matched by local charties. It may be loss than hal what the property is worth on the open markt “The Leaches are part of a conservation movement which started in Vermont in 41077 and has grown, over 20 years, Into 4,400 noa-prolit regional and local lane ‘rusts dotted through the 50 stales. AS a r0- ‘sul, over dm American acres have already been preserved from encroaching subdli- sions, shopping mals and other commercial ovelopments. Vermont alone has saved 110,559 acres. The sh New England states hhave most land trusts, more than a third of the total: Massachusetts has 121, more ‘than vast Calfornia's 116. Accorcing to tho Land Trust Allance, the umbretla organi tion for these groups, new trusts are ap- Pearing ata rato of ono a woek Iwas uncertainty about the futur that ‘made the Leaches decide to put Woodlawn Farm in must. The four Leach eniven are the seventh generation to ve an the farm since the early 1800s. For the past 90 years ‘Woodtavin has been a dairy farm, an en- angered species in America’s nort-east ‘Mr. Leach has butt up the herd and added {an automated miking perfour, ho now runs fone of the highest-yleloing mix operations IMPORTANT ISSUES Iv NATURAL RESOURCE ECONOMICS 7 In the state, Yet the volatity of mik prices hhas been a constant worry. “You can 90 from doing well ta doing peony.” says Wr Leach. "You don't know what wil happen Mr. Leach was suspicious when the Metiowee Valey Conservation Project, an farm of the Vermont Land Twst, moved 10 the valley ten years ago. "The idea ofa land trust fs not traditional. My stubborn Yankee Consorvative nature rojected the idea for years," he says. From the project's point of View, Woodlawn Farm was exactly what it was looking for: a solid, well-managed working farm wih a history. As a bonus, the Leashes also allowed access to hunters, fishermen and snowmobilers, Public access is not a requirement for Vermont iand-tust farm, bu thes. Joan Allen, the project director of the Metiowee Valley land tus, says that con peltion to take part in tho land trust pro- ‘gramme Is fierce, 1 takes a while to apply ‘and even longer to be appraised by the local agency and state offices. Inthe final stage, farm-ovners have lo appear before the Vermont Housing and Conservation Beard in Montpelier, the state capital 0 an- ‘wer questions, Mere than 100 farms, most ff them dairy ones, apply in Vermont each year, This year, 37 farms reached the final Stage; there was money for only 11. Not everyone agrees that soling devel- lopment rights to a land trust is the wisest choice for the landowner. The conservation easement, the legal 100! that makes the al work, is meant to be permanent. Al- though the children can inherit, they lose their rights 10 develop the land, even down to such details as adding a soptic tank. This ‘means that the value of the property is a minished. Yet the alternative, in most cases, is stark: they would be able to stay in toring Cis also say the land tust movernent is list. benefits the upper and upper ‘middle ciasses, the argument goes, by the (continued)18 SECTIONONE INTRODUCTION EXHIBIT 1-6—Contioued PRESERVING FARMLAND. COWS IN TUST strict standards imposes to protect the March 28rd, he concluded that in mary land: growth contro open space, main: cisos taming disappears anyay and what tained ecossystoms and the preservation lprterad is soon open space i cl ‘of town or village character. With land- a eutual sit toward the passive consump ‘rustonitored farms in th noighbourhood, ton of nature The Leachos, and many xo houses and land prices may’ 90 uP aking them, vllhope lis not as passive asa a. them outa he miido-case market Robert Rak, a professor at Hamphico Gallege In Amherst Massachusot, has g,S°WC, The Keane ay 17, 1007, © Sliced landrust consrvaton in th norte: febintsd war meme MEEEPS! tou, ne ‘east In a letter to the Now York Times on prone. of development right purchases may be to protect land from development, but not nécessarily to ensure that farming continues actively to be preserved. We will look at some of the major dimensions of land economics in Chapter 14. NATURAL RESOURCE ACCOUNTING. In 1997 the gross domestic product (GDP) of the United States was $8,111 bil- lion. This figure is an estimate of the total value of “final” goods and services produced in the economy, that is, goods and services supplied to households and other consumers. Among the countries of the world, increases in GDP are normally associated with growth and progress. They support growing popu- lations and make it possible to enjoy increases in per capita wealth and human welfare But conventional GDP measures are deficient in a number of respects. One important problem is that they measure only the value of goods and services that move through markets. So, for example, the value of volunteer work done in the country is not included, nor is the value of work done in the household by members of those households. Another problem is that they do not allow for natural resource depletion. Adjustments are normally made for the depre- ciation of human-produced capital goods—buildings, equipment, and the like—which, in the normal functioning of an economy, will be used up to some extent. Deducting capital from gross economic output leads to a meas- ure of net output But depreciation may also occur in a society's natural resource capital. The production of conventional goods and services requires inputs from the mtu ral environment, both in traditional forms, such as minerals, timber, water, and agricultural land, and also in the less widely recognized nontraditional services such as biological diversity, carbon fixation, and nutrient recycling. Natural resources supply important scenic resources basic to the large outdoor recreation industry, The resource base from which these goods and services are supplied can clearly be depreciated as a result of their use. Quantitatively,CHAPTER 1; MIPORTANT ISSUES IN NATURAL RESOURCE ECONOMICS 19 resources such as minerals used today reduce the stock available for future generations. Qualitatively, ecosystems may be impacted so much that they lose productivity, as in the case, for example, of soil erosion, ‘This has led some people to think about what is called natural resource ac- counting. This focus involves two types of work: The first is to estimate the value of ecosystem services provided by a country’s natural resource endow- ‘ment, so that they could be included along with standard output measures in the national economic accounts. {An example of this is the measurement of flood control values produced by many forested areas or the wildlife preservation val- ues produced by public parks or other wildlife refuge areas. As mentioned above, resource economists have worked to cevelop ways of accounting for these nonmarket service flows. The other part of the natural resource accounting effort is to assess the total value of the natural capital stock, so that we can deter~ mine the extent to which that stock is being depleted. Estimating natural re- source accounts is an important task of ecological economics, a new specialty within economics, in which researchers try to combine the principles of econom- ics and ecology to produce a more powerful way of looking at the role of natural resources and the impacts of economic activity on natural resource systems. INTERNATIONAL NATURAL RESOURCE CONFLICTS Natural resources historically have been the source of much conflict among countries of the world. As nations pursue their economic growth and develop- ment goals, these conflicts are likely to become more frequent and severe. Water resources have been a major issue, as Exhibit 1-7 discusses. Fights over surface water have led countries to the brink of war. Conflicts over access to productive fisheries have continued to flare up, though some of the basis for these has been removed with the 200-mile exclusionary zones now claimed by ‘most countries. Differences over rights to mine deep sea minerals may become more common as undersea mining technology continues to improve. Conflicts over access to undersea petroleum deposits continue in some parts of the world. Understanding the genesis of, and possible solutions to, international conflicts clearly calls for an understanding of how international law and inter- national political institutions function, or often don’t function. Bilateral treaties are often the result when a resource is shared between just two coun- tries (eg, the Pacific Salmon dispute between Canada and the United States). Multilateral agreements are required when multiple countries are involved {e4, the regional seas treaties sponsored by the United Nations). Economies-comes into the question when we want to understand the magni- tude of natural resource values that are affected, in total and for the individual countiés involved in disputes, and how these relative values might shift ac- cording to different patterns of agreement. Economic efficiency.is involved, be- cause it is important to be able to establish how a resource might be used so as to maximize its net social value. How the total gets divided is also extremely important, because fairness becomes an even more critical factor when itis the Tepresentatives of sovereign states who are doing the negotiating.20. SECTION ONE: INTRODUCTION exHBIT 1.7 Kenneth D. Frederick From Canada to Mexico, from Aca tothe Middle East, ror Asia to Europe, confess land the potential for contcts ace growing ‘over the availabilty of wator. White sharing water resources has lang been divisive, todays rising environmental, social, and f- hancial costs of managing Earth's most abundant and renewable natural resource ‘exacerbate these perennial tensions. Easing ‘such tensions becomes imperative ata tno when demands for water are rising. The ‘reaterefcencies achievable by intagrated resource management, developing water ‘markets, and price incentives may prove the Dost ways io achiove this end, ‘Several factors undere virually all inter- national conflicts over water and pose prob: lems for managing and allocating it off- ciently and equitably. These include the variability and uncertainty of supplies, the Interdependencies among users, and the increasing scarcity and rising costs of fresh- water. Because water Is a “fugitive ‘Source —naturally lowing trom one lecatlon land one slate (qui, gas, oF solid) to an- fther—individuals and counties have In- Ccontvas to capture and use the resource before it moves beyond their contrl but It ti, itary, incentive o conserve and protect supplies for downstream users. Rivers and lakes that border multiple counties, vers that flow trom one country to another, and aquifers that underlie more than one country are intemational resources: the use of the resource by one courity at- fecis the quantity or qualty ofthe resource available fo another county. Such situations ‘re numerous: about 200 river basine are shatod by two or moro counts. Thirteen are shared by five oF more countries, and four basins—the Congo, Danube, Nie, and \Niger—are shared by nine or more coun: ‘nes. Shared watersheds comprise about 47 pporcent ofthe global land area and moro {han 60 percent a he area onthe continants of Altea, Asia, and South Amarca WATER AS A SOURCE OF INTERNATIONAL CONFLICT ‘The competion for water in tho Micle East s 60 Intense that lasting peace in the rogion is unlikely in the absence of an agreement over shared water use. Outstanding issues and potential sources of confit include the allocation and co tol of the Jordan River, tho use of the aquifers underlying the West Bank, and Jordanian objections to the construction and operation of Syrian dams on the Yarmuk, the major tibutary of the Jordan ver, Water has already been the source of armed contlict In the rogion betwoon Syria and Israel, ance in the 19508 and ‘again inthe 1960 ‘When the Incian subcontinent was part- tioned between India and Pakistan in 1947, longstanding conflicts over the Indus Fiver ‘became overnight an international issue be- ‘ween twa hostia countries. The partionng

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